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What to do and what to avoid 10 years from retirement

Andrew Zbik  |  16 Sep 2016Text size  Decrease  Increase  |  

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Australians who have 10 years left until they retire could consider using equity in their home to fund SMSF investing, while being neutrally or positively geared in case of redundancy, injury or illness.


The average superannuation balance for Australians aged 45-54 is $151,500 for males and $90,800 for females.

Australians aged 55-64 have an average balance of $322,000 for males and $180,000 for females. That really is not much.

I call the last 10 years of working life the "home run" decade. It is the last chance that you have to properly set up a plan, to maximise the capital you have to support an income stream in retirement.

The biggest problem I come across with some new clients is they really start to get serious about retirement planning about three years before they plan to retire. This is too late to start planning.

At three years out, it's about accepting your fate and settling with the fact that you may not achieve anything near what you expected you would have.

There is plenty of material about maximising concessional contributions and non-concessional contributions as a plan for retirement. Yes, this is a basic strategy and it works.

With recent Federal Budget changes, the days of transition-to-retirement pensions are pretty much gone.

So what can you do as well as the basics mentioned above that are already widely published?

Look at the equity in your home! For many Australians aged 50-55, their children are now beginning to be financially independent.

There is a transition happening between household expenses lowering and savings increasing. Plus, there is now substantial equity in the home.

Many would naturally think about using this equity to buy assets such as shares and property in their own name. However, this means that you have assets where income and capital growth are taxed at your marginal tax rate.

Here is an idea: Consider moderate gearing levels

The ATO, in its Practical Compliance Guidelines 2016/5 published in April, set out very clearly how people can lend money to their self-managed superannuation fund.

What this means is a couple or individual can access some of the equity in their home via a line-of-credit. They can then lend this money to their own self-managed superannuation fund.

This is called a "member loan" or the fancy technical name is a "limited recourse borrowing arrangement (LRBA)".

The great aspect of this ATO Guideline is it tells us what level of gearing one can have inside super for buying property--70 per cent loan-to-value ratio (LVR) or shares a 50 per cent LVR.

It tells what interest rate must be charged to the superannuation fund. The term of the loan. That a mortgage needs to be registered over the property.

The guidelines make it very clear how to structure a member loan or LRBA to be compliant in the eyes of the ATO.

The benefit of this strategy is the assets are now owned in a concessionally-taxed environment.

As current legislation stands, once the asset is sold when the superannuation fund members are retired and drawing a pension there is no capital gains tax. The loan can be paid out at any time.

In principle, if you have a property purchase or share portfolio that has an LVR of between 30 per cent to 40 per cent, the rental income or dividend income will generally be sufficient to cover the interest costs of the loan. Thus, your asset is neutrally or positively geared.

This is a smart strategy to ensure any borrowings are neutrally geared in the event of redundancy, injury or illness that reduces one's capacity to work.

If the asset pays for itself there is no drain on cash flow if income is reduced or lost and it gives ample time to decide if it is appropriate to sell the asset.

Finally, if you are in your "home run" decade, beware of putting yourself into debt up to your eyeballs. If you are made redundant or fall ill and cannot work you then you may have problems to consider.

More from Morningstar

• Here's the right way to help out your kids

• Here's why every SMSF member needs an enduring power of attorney


Andrew Zbik is a senior financial planner with Omniwealth, a non-aligned Australian wealth advisory group. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.

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